It is an extremely encouraging start to the year for commodity investors when using the Dow Jones Commodity Index rallying nearly Nine percent in the January lows. This is extremely good news for that resource heavy S&P TSX, that’s outperforming globally, up more than 11.Five percent in the lows and ahead by 2 percent year-to-date.
In particular, it has been a superb rebound for Canadian energy stocks using the Capped Energy Index up over 27 % in the last couple weeks with some coal and oil companies seeing their share prices double within the same period.
The big question everyone is asking is that if this really is sustainable or otherwise, when using the most of the pundits leaning towards the latter.
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In our thoughts, five main reasons makes this feel a little unique of the dead-cat bounces of background and may mean there’s a bright light after what’s been a very dark tunnel.
1. It is not only oil that’s rebounding
Crude oil isn’t just one appears to possess found a bottom as other commodities for example base metals have just started to post some large moves for the upside. Based on Bloomberg, iron ore sent to Qingdao, China, rocketed over 19% Monday morning, its biggest daily gain returning to 2009 and reaching its highest price in eight months.
While there was not doubt an enormous oversupply developed using the commodity super cycle from 2001 to 2008 as well as the low-rate environment from mid-2009 to mid-2014, the main city taps have since been turn off leaving many not able to even service their debt given flat to negative cash flows.
The very good news is always that global economies, especially struggling emerging markets, have developed an amazing rise in relation to its economic stimulus from ultra-low prices. Consequently, needs have had the opportunity to stay fairly robust and growing since the oversupply experiences its natural decline with no necessary capital to sustain itself.
2. Stocks and commodities are generally oversold
A good way of identifying a business bottom is the place both commodity and stocks are in fact sold down together to new lows like what transpired during the financial crisis. However, one has to become careful of catching a falling knife and purchasing false bottoms for example what transpired noisy . 2015.
Looking in our environment, the WTI to Capped Energy Index ratio has breached this 2015 low, falling down again to 2009 levels. This is sometimes a very encouraging symbol of a heavily oversold market and potential bottom for stocks and oil prices.
3. It has an increasing correlation between oil and broader equity markets
The largest equity market in the world is once more beginning to move with commodities, especially oil. This is very important as the two had disconnected completely because the summer of 2014 and moved in opposite directions.
History suggests that the oil price peak usually precedes a fiscal downturn and an oil price bottom precedes a fiscal recovery. However, the earth economy now never entered a fiscal downturn, especially the U.S., and also the large visit oil price was because of an oversupply issue.
Therefore, to discover the oil price move higher with equity markets like the S&P 500 is surely a encouraging sign.
4. The U.S. dollar is peaking
The rocketing U.S. dollar is wreaking injury to U.S. corporate profitability, something the government Reserve is keenly mindful of when setting its interest rate policy. This will be relevant given a rising dollar results in lower commodity prices as well as the other way around.
5. The this-time-it’s-different mentality
In my entire career I’ve never heard someone call a near-term large move off a remarkably oversold market being sustainable. The headlines continue being full of “this will probably be short lived” or “this time it’s different” much like what’s been postulated during other market bottoms.
It’s think about this that history indicates that every time there is an in-depth oil-price decline they have been along with a sizable recovery.
The 79-per-cent decline from 2008 to 2009 was plus a 274-per-cent recovery; the 59-per-cent decline from 1996 to 1998 was along with a 244-per-cent recovery; the 66-per-cent decline from 1990 to 1993 was plus a 90-per-cent recovery; along with the 62-per-cent decline from 1985 to 1986 was along with a 273-per-cent recovery.
Martin Pelletier, CFA, can be a portfolio manager at Calgary-based TriVest Wealth Counsel Ltd. twitter.com/trivestwealth
